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Algeria Playing a Risky Fiscal Consolidation Game, IMF Says

(Bloomberg) -- Algeria should weaken its currency, consider external financing and broaden its policy options to stimulate its economy, the International Monetary Fund said in a report.

The current focus on import restrictions and belt-tightening may encourage growth in the short-term but risk suppressing it further out by stoking inflation and further eroding foreign reserves that are already half their 2013 highs, the Washington-based lender said. It recommended a gradual exchange rate depreciation, external borrowing, more diverse financing avenues and measures to encourage private sector activity.

The IMF “shares the authorities’ dual objectives of economic stabilization and promotion of more inclusive growth,” the report said. But it “considers that there still is some space to pursue a less risky strategy that would achieve better outcomes.”

OPEC member Algeria, which relies on oil exports for most of its foreign funds, has been struggling to boost economic growth at a time when inflation is climbing, foreign reserves are falling and unemployment is high. Preliminary estimates show the economy expanding 1.6 percent in 2017, rising to 3 percent in 2018, then slipping to 2.7 percent the following year, the IMF said.

While the government cut spending after oil prices dropped in 2014, digging deeper into its foreign reserves, it ramped up expenditures as prices started to climb. It also began curbing imports, resisted external borrowing and focused on fiscal consolidation, despite IMF warnings. Instead of foreign borrowing, the central bank lent directly to the treasury.

“In the short term, the authorities’ new strategy will likely improve growth but also exacerbate fiscal and external imbalances,” the IMF said. “In the medium term, it risks increasing inflation, accelerating the loss of international reserves, and lowering growth.”

The fund advised that authorities do more to boost private sector growth, cut red tape, improve access to financing and further open the economy to trade and foreign investment.